The Poisoned Chalice
By: Gwynne DyerAS the opinion polls move steadily in favour of President George W. Bush and the likelihood of a John Kerry presidency recedes, Democrats in the United States can take solace in two facts.
If their man is not in the White House for the next four years,
then they will not end up carrying the blame for the almost
inevitable US defeat in Iraq -- and they will not have to preside
over the biggest financial crisis to hit the United States since
the Great Depression.
"The US dollar is going the way that [the British pound] went as
it lost its place as the world's reserve currency," said Jim
Rogers, the Wall Street wizard who in 1973 co-founded the Quantum
Fund, one of the first and most successful hedge funds, in a recent
interview.
"I suspect there will be exchange controls in the US in the
foreseeable future....Whoever is elected president is going to have
serious problems in 2005-06.
We Americans are going to suffer."
Why? If Mr Kerry won, this would be the third time in a row that
an incoming Democratic president inherited a gigantic budget
deficit from his Republican predecessor.
Jimmy Carter took over a budget deficit of almost four percent
of Gross Domestic Product in 1976 and halved it in four years.
Bill Clinton was handed a budget deficit amounting to six
percent of GDP in 1992 and turned it into a 1.5 percent surplus in
eight years.
Mr Kerry would inherit a five percent deficit from Mr Bush,
about par for the course -- but for the first time he would also be
burdened with a huge current account (trade) deficit.
When Jimmy Carter was president, US trade with the rest of the
world was more or less in balance, which made it relatively easy
for him to address the budget deficit.
America's trade balance went deep into the red during the Reagan
years, but by the time Bill Clinton came into office it had
recovered dramatically and so he, too, could fix the budget deficit
without having to worry about a big trade deficit.
But in the last Clinton years the current account plunged into
deep deficit, and it's now even worse.
It's the combination of the two deficits that is potentially
lethal.
The United States got away with running a big trade deficit for
most of the past twenty years because foreigners, mostly in Asia
and Europe, kept on investing in the US, and that huge inflow of
foreign capital largely covered the deficit.
They invested in the US not because it was the world's
fastest-growing economy (it wasn't), but mainly because the US
dollar was seen as the safest currency, the world's "reserve
currency" in which other countries settle their debts even with
each other.
That was then; this is now.
The inflow of foreign capital is dwindling, the current account
deficit is up to half a trillion dollars a year -- and the budget
deficit, thanks to the Bush tax cuts and the Iraq war, is also up
to half a trillion dollars a year.
Neither Mr Bush nor Mr Kerry even discusses the issue, and the
value of the US dollar has been drifting steadily down for a year
and a half now.
Foreigners have seen the value of their US investments
effectively cut by 20 percent because of that fall in the dollar,
and they are getting nervous.
Foreigner investors hold about $8 trillion in US securities, and
everybody realises that a concerted move to bail out of them would
trigger a collapse of the dollar and the destruction of their
investments.
On the other hand, everybody also knows that the first investors
to get out will save most of their money, and the laggards will
lose most of theirs.
It is a highly unstable situation.
A far-sighted Democratic strategist might therefore conclude
that this is the wrong year to win the presidency.
Democrats don't want the blame for an impending economic crisis
that is mostly due to the Bush tax cuts -- and since their chosen
candidate has no strategy for pulling out of Iraq, why not let the
Republicans collect the blame for that debacle, too? There is going
to be a smash; it's too late to avoid it; let the other lot stay in
the driver's seat for now.
We'll win next time, and stay in power for a generation.
But there is no sign that anybody in the Democratic Party is
making such a calculation: they are genuinely committed to fighting
Bush.
At the least, that will lend authenticity to their defeat, and
win them credit for next time.
And if John Kerry should win, thanks to some wild card we have
not yet seen, it may be rough on the Democratic party but it
wouldn't necessarily be bad for the United States or the world.
Though Mr Kerry now vows to "stay the course" in Iraq, he is
likelier than the crew around Mr Bush to accept reality and pull
American troops out before too much damage is done.
And if economic disaster strikes the United States in the next
four years, as it well may, he is less likely than Mr Bush to
devote all his energy to shifting the blame for it onto
foreigners.
* Gwynne Dyer is a London-based independent journalist whose
articles are published in 45 countries.
"The US dollar is going the way that [the British pound] went as it
lost its place as the world's reserve currency," said Jim Rogers,
the Wall Street wizard who in 1973 co-founded the Quantum Fund, one
of the first and most successful hedge funds, in a recent
interview."I suspect there will be exchange controls in the US in
the foreseeable future....Whoever is elected president is going to
have serious problems in 2005-06.We Americans are going to
suffer."Why? If Mr Kerry won, this would be the third time in a row
that an incoming Democratic president inherited a gigantic budget
deficit from his Republican predecessor.Jimmy Carter took over a
budget deficit of almost four percent of Gross Domestic Product in
1976 and halved it in four years. Bill Clinton was handed a budget
deficit amounting to six percent of GDP in 1992 and turned it into
a 1.5 percent surplus in eight years.Mr Kerry would inherit a five
percent deficit from Mr Bush, about par for the course -- but for
the first time he would also be burdened with a huge current
account (trade) deficit.When Jimmy Carter was president, US trade
with the rest of the world was more or less in balance, which made
it relatively easy for him to address the budget deficit.America's
trade balance went deep into the red during the Reagan years, but
by the time Bill Clinton came into office it had recovered
dramatically and so he, too, could fix the budget deficit without
having to worry about a big trade deficit.But in the last Clinton
years the current account plunged into deep deficit, and it's now
even worse.It's the combination of the two deficits that is
potentially lethal.The United States got away with running a big
trade deficit for most of the past twenty years because foreigners,
mostly in Asia and Europe, kept on investing in the US, and that
huge inflow of foreign capital largely covered the deficit.They
invested in the US not because it was the world's fastest-growing
economy (it wasn't), but mainly because the US dollar was seen as
the safest currency, the world's "reserve currency" in which other
countries settle their debts even with each other.That was then;
this is now.The inflow of foreign capital is dwindling, the current
account deficit is up to half a trillion dollars a year -- and the
budget deficit, thanks to the Bush tax cuts and the Iraq war, is
also up to half a trillion dollars a year.Neither Mr Bush nor Mr
Kerry even discusses the issue, and the value of the US dollar has
been drifting steadily down for a year and a half now.Foreigners
have seen the value of their US investments effectively cut by 20
percent because of that fall in the dollar, and they are getting
nervous.Foreigner investors hold about $8 trillion in US
securities, and everybody realises that a concerted move to bail
out of them would trigger a collapse of the dollar and the
destruction of their investments.On the other hand, everybody also
knows that the first investors to get out will save most of their
money, and the laggards will lose most of theirs.It is a highly
unstable situation.A far-sighted Democratic strategist might
therefore conclude that this is the wrong year to win the
presidency.Democrats don't want the blame for an impending economic
crisis that is mostly due to the Bush tax cuts -- and since their
chosen candidate has no strategy for pulling out of Iraq, why not
let the Republicans collect the blame for that debacle, too? There
is going to be a smash; it's too late to avoid it; let the other
lot stay in the driver's seat for now.We'll win next time, and stay
in power for a generation.But there is no sign that anybody in the
Democratic Party is making such a calculation: they are genuinely
committed to fighting Bush.At the least, that will lend
authenticity to their defeat, and win them credit for next time.And
if John Kerry should win, thanks to some wild card we have not yet
seen, it may be rough on the Democratic party but it wouldn't
necessarily be bad for the United States or the world.Though Mr
Kerry now vows to "stay the course" in Iraq, he is likelier than
the crew around Mr Bush to accept reality and pull American troops
out before too much damage is done.And if economic disaster strikes
the United States in the next four years, as it well may, he is
less likely than Mr Bush to devote all his energy to shifting the
blame for it onto foreigners.* Gwynne Dyer is a London-based
independent journalist whose articles are published in 45
countries.